March 30, 2017 7:10 pm

The Consequences of Unmonitored Charter Schools

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By Jim Hall

Secretary Devos stated in her Senate confirmation hearings that she supports equal transparency for all organizations receiving public education funds. The most basic transparency is a simple accounting of where educational organizations spend public dollars. This transparency is sorely lacking in many states, especially in Arizona.

Arizona has the fourth largest number of charter schools in the nation and is the only state in the U.S. that does not allow the Auditor General to monitor charter school spending. Charter schools in Arizona are chartered at the state level through the Arizona State Board for Charter Schools. The Charter Board is the only agency authorized to regulate charter schools in Arizona. The Charter Board requires charter holders to submit an annual audit to determine if the school is financially solvent – if it has adequate cash flow and cash reserves. No agency in Arizona monitors how charters spend tax funds.

Arizona charter schools and public districts submit an annual financial report detailing spending. The Auditor General uses this information to help create a report card for all public districts that focuses on classroom spending. There was a headline on AZ Central on March 2nd lamenting that classroom spending had gone down in 2016.

But the spending for charter schools isn’t compiled. Arizonans for Charter School Accountability recorded the revenue, the M&O expenditures, teacher salaries, benefits, instructional purchase services, and instructional supplies for all charter holders that submitted an Annual Financial Report in 2016. Enrollment numbers are also not compiled so the enrollment for each charter was gleaned from the October 1 Enrollment Report all schools submit.

The data was then used to calculate how much each charter holder spent on classroom instruction, administration, and facilities. 

This is what the Auditor General’s Office would have found if they were allowed to monitor charter spending in 2016:

  • Part 1 – Less than half of all Arizona charters (191 out of 411) spend more in the classroom than on administration and facilities combined. These ‘efficient” charters were both large and small and represented the broad range of charter models – college prep, alternative, arts focus, etc. Many had substantial mortgages and have new, modern facilities. It is possible for charter schools to focus their budget on classroom instruction.
  • Part 2 – The majority of Arizona Charter schools (220 out of 411) spend more money on management and facilities combined than on classroom instruction. Fifty charter schools spent more on just administration than in the classroom. Sixty-two charters spent more on their facilities than on classroom instruction. Shockingly, 29 charter schools spend more for both management and facilities individually than in the classroom. The Leona Group LLC ran nine of these schools and three were run by Imagine Inc., both large national management companies.
  • Part 3 – The Leona Group Inc. operates in five states. Leona managed schools spend the least on classroom instruction in Arizona. We found that the owner of the for-profit Leona Group LLC., Bill Coats, sold 10 schools he owned in 2007 to his non-profit foundation, The American Charter Schools Foundation (ACSF), for double their market value. Coats also created management contracts that have a set fee that increases annually, regardless of the school’s revenue. Today, the 10 ACSF schools have excessive management costs and extremely large mortgages, but have declined in enrollment by 25% since 2007. The result is schools that spend less than 20% of their budget on all classroom instruction, but provided Bill Coats with a $25 million payday in 2007.
  • Part 4 – Imagine Inc. operates in 11 states and D.C. For-profit Imagine Inc. manages 19 schools in Arizona for their non-profit Imagine Schools Non-Profit Inc. The Arizona Imagine schools spend $12 million more on management and facilities then in the classroom in 2016 as the result of “self-dealing”, a practice that caused a Federal judge in Missouri to fine Imagine Inc. $1 million in 2015. Imagine uses a myriad of accounting schemes to bolster profits including charging schools “loss mitigation” fees of 2% of gross revenues to cover financial losses caused by their mismanagement. 12 of the 19 Arizona Imagine schools are in financial difficulty, yet have some of the highest administration and facilities costs in the state.

When looking at total per pupil expenditures, we found that there were schools that spent far less per pupil total than most charter schools. These schools are operating their schools for millions less than they receive in state funds, and taking the rest as profit. The first two we looked at were Primavera Online and Pinnacle Schools MGRM:

  • American Virtual Academy Inc. – Primavera Online High School was the most successful non-profit in Arizona with assets of over $44 million.  In 2015, non-profit Primavera Technical Learning Center suddenly decided to go out of the charter business and give the school to its software vendor, the for-profit American Virtual Academy (AVA), free of charge.  In 2016 , AVA hired FlipSwitch Inc. to provide the licenses for the courseware used by the school for $13 million.  AVA made a clear profit of $10 million in 2016.  
    • Damian Creamer owns all of these companies.  Between 2009 and 2015 Creamer took over $1 million in salary a the director of the non-profit and paid his company AVA $84 million in licensing fees.  As sole owner of for-profit AVA, Creamer reaped a $10 million profit plus $13 million in licensing fees from his company FlipSwitch Inc.  in 2016. Creamer’s new company, SoundMinds, is now selling the software created for Primavera to online schools around the nation.
  • Pinnacle Education MGRM – is owned by a multi-national software company based in India, MGRM.  In 2016 the 4 Pinnacle charter schools (enrollment 620), using online software created by MGRM, spent $3.4 million to run the schools and sent $3.4 million back to corporate headquarters as profit.  

Arizona online charter schools are funded at 95% of what a regular charter schools receives per pupil plus an additional $1700-$2000/pupil all charter schools get to pay for equipment and facilities; funds public districts do not receive. Online schools have little facilities costs and offer few of the programs all public schools must provide – transportation, food service, libraries, band, P.E., etc. As a result, online charters are extremely over funded and are able to take tens of millions of dollars of tax funds as corporate profits.  American Virtual Academy and Pinnacle Education MGRM are perfect examples.

Charter schools across the nation do not have the same level of transparency as required of public districts. Without transparency, there is no way of knowing how public funds are being expended. If we can’t monitor the spending of “public” charter schools, how will we ever account for voucher funds given to private organizations?  

 

(All of the research in this report is available for download at http://www.azcsa.org/past-research.html)